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Issues involved: Disallowance of proportionate interest paid on amounts invested in subsidiary companies u/s 14A.
Details of the judgment: 1. The appeals were filed by the assessee against the orders of the CIT(A) XXVI, Mumbai for assessment years 2004-05 and 2006-07. The main issue in both appeals was the disallowance of proportionate interest paid on amounts invested in subsidiary companies invoking provisions of section 14A. 2. The assessee contended that the investments in the joint venture company were for business purposes, citing the principles established by the Hon'ble Supreme Court in the case of CIT vs. S.A. Builders Ltd. The assessee argued that there were no borrowed funds invested in the joint venture company and no exempt income was earned during the year. However, the A.O. disallowed proportionate interest, which was confirmed by the CIT(A). 3. The learned counsel for the assessee submitted that the funds were used for working capital requirements and not diverted for investment in the joint venture company. The original investment was made in a previous year, and the interest claim was allowed in subsequent years. The sales made by the assessee company to the joint venture company showed a direct increase in business. The assessee argued that the interest paid on borrowings for business expansion should be allowed u/s 36(1)(iii) and section 14A should not apply. 4. The CIT(A) had confirmed the order invoking Rule 8D, but the Special Bench decision in the case of Daga Capital Management Pvt. Ltd. was not approved by the Hon'ble Bombay High Court. The Tribunal held that the factual aspects regarding the claim of interest by the assessee needed further examination, especially regarding the diversion of borrowed funds to subsidiary companies. The matter was restored to the file of the A.O. for examination of facts and appropriate decision-making. 5. The Tribunal allowed the appeals of the assessee for statistical purposes, emphasizing the need for a detailed examination of facts and legal principles before disallowing interest under section 36(1)(iii) and section 14A. Judges: D. Manmohan (Vice President) and B. Ramakotaiah (Accountant Member)
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